What are NFTs?

What does “non-fungible” mean?

“Fungible” means interchangeable. One ether (ETH), or one unit of a stablecoin such as USDC, is worth the same as any other, so you do not care which one you hold. ethereum.org describes fungible tokens as ones where “every token is identical and has the same properties”.

A non-fungible token is the opposite. In ethereum.org’s words, “NFTs are tokens that are individually unique.” Each has its own properties and its own identity on the chain. On Ethereum, the common technical standard for NFTs is ERC-721, proposed in January 2018. Under that standard, the combination of a smart contract’s address and a token ID must be globally unique — that pair is what makes one NFT different from every other.

If Ethereum and smart contracts are new to you, start there: an NFT is simply an entry recorded by a smart contract.

What can an NFT represent?

ethereum.org says the uniqueness of NFTs enables the tokenisation of things such as art, collectibles or even real estate, where one specific token represents one specific item. EU supervisors give digital art and collectibles as typical examples.

The key feature is the ownership record: “Ownership of an asset is publicly verifiable on Ethereum.” Anyone can look up which wallet address holds a given token. That is a record of who holds the token. Whether that token means anything off the blockchain depends on the project behind it and on the terms it publishes.

If I buy an NFT, do I own the artwork?

Not automatically. In March 2024 the US Patent and Trademark Office and the US Copyright Office sent Congress a joint report on NFTs and intellectual property. It is blunt: “There is nothing inherent to a token that would automatically transfer the rights in an associated asset.”

The same report explains that the token is usually a pointer, not the work itself: “Often the token will point to a copy of the work represented by the NFT but does not usually contain a copy of the work itself.” So the picture you see is typically stored somewhere else, and the NFT records a link to it.

What you can legally do with the image — display it, print it, sell merchandise — depends on the licence or terms the creator attached, if any. If no rights are stated, assume you have bought the token and nothing more. Before paying, look for the project’s written licence and read what it actually grants.

How do you buy and hold an NFT?

NFTs live on a blockchain and are held by a wallet address, so you need a crypto wallet. You usually buy on a marketplace or “mint” (create) a new token directly from a project’s smart contract, paying in crypto plus a network fee (gas).

Whoever controls the wallet’s private key controls the NFT. ethereum.org says security issues around NFTs “are most often related to phishing scams, smart contract vulnerabilities or user errors (such as inadvertently exposing private keys), making good wallet security critical for NFT owners.” ethereum.org also notes that interactions with smart contracts are irreversible, so a mistaken transfer usually cannot be undone.

What NFT scams does the FBI warn about?

In August 2023 the FBI’s Internet Crime Complaint Center (IC3) warned about criminals posing as NFT developers. It said: “Criminals either gain direct access to NFT developer social media accounts or create almost identical accounts to promote new NFT releases.” The posts link to a spoofed mint website. Then: “The victims unknowingly connect their cryptocurrency wallets to a drainer smart contract, resulting in the transfer of cryptocurrency and NFTs to wallets operated by criminals.”

The FBI’s advice, in short:

• Check the social media account is the real development team’s account, not a clone.
• Before connecting a wallet, check the website is genuine and not a copy.
• Be sceptical of NFT “rewards” or giveaways that feel too good to be true.
• Report fraud to the FBI at ic3.gov.

A second pattern is the “rug pull”. The US Department of Justice (DOJ) describes it as “a scenario where the creator of an NFT and/or gaming project solicits investments and then abruptly abandons a project and fraudulently retains the project investors’ funds”. In March 2022 federal prosecutors in New York charged two people over the “Frosties” NFT project, alleging they abandoned it within hours of selling out and moved about $1.1 million in crypto proceeds. Charges are allegations, not proof of guilt. Our guide to crypto scam red flags covers more warning signs.

Are NFTs regulated?

It depends on how they are sold and where. In August 2023 the US Securities and Exchange Commission (SEC) charged a media company, Impact Theory, over NFTs called “Founder’s Keys”. The company had “raised approximately $30 million from hundreds of investors”, and the SEC found that “the NFTs offered and sold to investors were investment contracts and therefore securities”. Without admitting or denying the findings, the company agreed to pay “more than $6.1 million in disgorgement, prejudgment interest, and a civil penalty”. That case is a dated example; regulators’ approach to crypto can change.

In the European Union, supervisors say crypto-assets that are unique and non-fungible are excluded from the MiCA crypto rules — but so-called NFTs issued as part of a series or collection may still fall within them. Outside regulated products, consumer protections can be thin or absent.

What are the risks of buying NFTs?

• Scams and wallet drainers. Hijacked or cloned project accounts push fake mint links (FBI, 2023).
• Rights you did not get. Owning the token does not automatically give you rights in the artwork (USPTO and US Copyright Office, 2024).
• Hard to sell. EU supervisors warn that crypto-asset markets “may experience liquidity constraints, which could limit your ability to sell crypto-assets at the price or time you want.” Each NFT is unique, so a sale needs a buyer for that exact token.
• Project abandonment. If the team disappears, any promised utility may vanish with it (DOJ rug-pull definition).
• Irreversible mistakes. Smart-contract interactions cannot be undone, and stolen assets are mostly irrecoverable (ethereum.org).
• Limited protection. Unique NFTs fall outside the EU’s MiCA rules, so consumer protections can be thin or absent.

Blockhorizon is an education site. Nothing here is a recommendation to buy, sell or hold any NFT or crypto-asset.